Tuesday, January 22, 2008

stimulus = gimmicks; five reasons to put the gimmicks back in the bag

Again, from the WSJ, an op-ed from a former congressman and a policy analyst-- both quite familiar with the workings of the Ways & Means Committee...

There are five principal reasons why a politically motivated economic stimulus bill should not be enacted in the middle of the presidential primary season.

First, from a legislative process perspective there is no way that a tax cut can be enacted in the first quarter of 2008. Thus, fiscal policy action would come too late if one accepts the gloomiest economic forecast.

Second, perhaps the easiest "stimulus" package Washington could to enact would be to drop money from planes into the hands of voters/consumers. However, the economic evidence from the 2001 experience suggests this is an ineffective tool. Professors Matthew Shapiro and Joel Slemrod from the University of Michigan found that most rebates were saved, not spent. While this result may be a disappointment to those of us who thought this approach would be effective, Congress must be willing to learn from past legislative experience. Popular versus effective is sometimes the difference between politics and economics.

The 2003 tax cut, which has been shown to have delivered a significant positive economic punch, lowered the tax rate on capital gains and dividends to 15%, accelerated the reduction in tax rates on labor, and offered businesses 50% bonus depreciation to stimulate investment....

Third, the 2003 tax cut was enacted in an environment when monetary policy was possibly near the end of its rope. The federal funds rate was 1.25%, and the Federal Reserve had only untried and unusual policy remedies left. Not so today....

Fourth, although the political calendar suggests that now is the time to launch the stimulus debate, the economic data are far from compelling. While some on Wall Street have recently issued forecasts for recession, the data to date only indicate elevated risks....

Finally...the amplified rhetoric of economic doom from leaders and hopeful leaders in Washington may become a self-fulfilling prophecy as consumers curtail their spending in response to the predictions of recession by their favorite candidates.


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